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News releases

Reported net income for the second quarter under Generally Accepted Accounting Principles (GAAP) of $193 million, or $1.56 per diluted share, compared to net income of $293 million, or $2.36 per diluted share in the second quarter of 2017. As the company has recently implemented new accounting standards, including the standards relating to revenue recognition and retirement benefits, 2017 financial information has been adjusted.

Reported second quarter 2018 adjusted diluted earnings per share of $1.66 compared to $2.48 reported in the second quarter of 2017. Second quarter adjusted net income excluding special items such as merger-related costs and mark-to-market fuel hedge accounting adjustments was $206 million compared to $309 million in the second quarter of 2017. This quarter's adjusted results compare to the First Call analyst consensus estimate of $1.63 per share.

Paid a $0.32 per-share quarterly cash dividend in the second quarter, a 7% increase over the dividend paid in the second quarter of 2017.

Repurchased a total of 389,739 shares of common stock for approximately $25 million in the first six months of 2018.

Generated approximately $725 million of operating cash flow, including merger-related costs and other special items.

Held $1.6 billion in unrestricted cash and marketable securities as of June 30, 2018.

Operational Highlights:

Transitioned to a single Passenger Service System (PSS) in April 2018, enabling us to provide one reservation system, one website and one inventory of flights to our guests.

Reached a merger transition agreement with the Transport Workers Union (TWU) to combine Boeing and Airbus dispatchers into a single group.

Added two Boeing 737-900ER aircraft and two Airbus A321neo aircraft to the mainline operating fleet in the second quarter of 2018. Added four Embraer 175 (E175) regional jets to Horizon Air's fleet in the second quarter of 2018 and four E175 aircraft operated by SkyWest Airlines.

Recognition and Awards:

Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2018 by J.D. Power for the 11th year in a row.

Received top honors in three Skytrax World Airline Awards categories including "Best Regional Airline in North America," "Best Airline Staff in North America," and "Best Cabin Crew in the USA."

Virgin America was rated Best Domestic Airline in Travel + Leisure "World's Best Awards" for 11 years in a row.

Ranked among Forbes' 2018 "America's Best Employers" for the fourth year in a row.

Awarded "Best Food and Beverage in the Americas" by Airline Passenger Service Experience Association (APEX) passenger choice awards for 2018.

Received 17th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.

Alaska Air Group, Inc., (NYSE: ALK) today reported second quarter 2018 GAAP net income of $193 million, or $1.56 per diluted share, compared to $293 million, or $2.36 per diluted share in the second quarter of 2017. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $206 million, or $1.66 per diluted share, compared to $309 million, or $2.48 per diluted share, in 2017.

"In the last year and half, we've made tremendous progress bringing Alaska Airlines and Virgin America together," said CEO Brad Tilden. "We're on very solid footing today thanks to the fantastic efforts of our employees, who delivered exceptional on-time performance and earned our 11th consecutive J.D. Power award for highest in customer satisfaction - all while completing the most complex part of our integration."

The following table reconciles the company's reported GAAP net income and earnings per diluted share (diluted EPS) for the three and six months ended June 30, 2018 and 2017 to adjusted amounts.

Three Months Ended June 30,

2018

2017 (a)

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

193

$

1.56

$

293

$

2.36

Mark-to-market fuel hedge adjustments

(22)

(0.18)

2

0.02

Special items—merger-related costs

39

0.31

24

0.19

Income tax effect

(4)

(0.03)

(10)

(0.09)

Non-GAAP adjusted net income and diluted EPS

$

206

$

1.66

$

309

$

2.48

Six Months Ended June 30,

2018

2017 (a)

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

197

$

1.59

$

386

$

3.10

Mark-to-market fuel hedge adjustments

(35)

(0.28)

12

0.10

Special items—employee tax reform bonus

25

0.20

—

—

Special items—merger-related costs

45

0.36

63

0.51

Income tax effect

(8)

(0.06)

(28)

(0.23)

Non-GAAP adjusted net income and diluted EPS

$

224

$

1.81

$

433

$

3.48

(a)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the second quarter results will be streamed online at 8:30 a.m. Pacific time on July 26, 2018. It can be accessed at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as "Alaska," "Horizon," and "Virgin America" respectively, and together as our "airlines."

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2017, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines and its regional partners fly 44 million guests a year to more than 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Airline Satisfaction Study for 11 consecutive years from 2008 to 2018. Learn about Alaska's award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

Three Months Ended June 30,

Six Months Ended June 30,

(in millions, except per-share amounts)

2018

2017(a)

Change

2018

2017(a)

Change

Operating Revenues:

Passenger revenue

$

1,997

$

1,945

3

%

$

3,682

$

3,547

4

%

Mileage plan other revenue

108

109

(1)

%

215

209

3

%

Cargo and other

51

48

6

%

91

86

6

%

Total Operating Revenues

2,156

2,102

3

%

3,988

3,842

4

%

Operating Expenses:

Wages and benefits

544

470

16

%

1,080

920

17

%

Variable incentive pay

38

27

41

%

77

58

33

%

Aircraft fuel, including hedging gains and losses

475

344

38

%

884

683

29

%

Aircraft maintenance

106

96

10

%

213

183

16

%

Aircraft rent

77

69

12

%

151

134

13

%

Landing fees and other rentals

110

99

11

%

236

214

10

%

Contracted services

76

77

(1)

%

157

158

(1)

%

Selling expenses

88

102

(14)

%

166

185

(10)

%

Depreciation and amortization

97

90

8

%

191

180

6

%

Food and beverage service

55

50

10

%

105

95

11

%

Third-party regional carrier expense

39

27

44

%

76

54

41

%

Other

141

140

1

%

282

271

4

%

Special items—merger-related costs

39

24

63

%

45

63

(29)

%

Special items—other

—

—

—

%

25

—

NM

Total Operating Expenses

1,885

1,615

17

%

3,688

3,198

15

%

Operating Income

271

487

(44)

%

300

644

(53)

%

Nonoperating Income (Expense):

Interest income

10

9

18

16

Interest expense

(25)

(26)

(49)

(51)

Interest capitalized

4

4

9

8

Other—net

(1)

—

(13)

(1)

Total Nonoperating Income (Expense)

(12)

(13)

(35)

(28)

Income (Loss) Before Income Tax

259

474

265

616

Income tax expense

66

181

68

230

Net Income (Loss)

$

193

$

293

$

197

$

386

Basic Earnings (Loss) Per Share:

$

1.57

$

2.37

$

1.60

$

3.12

Diluted Earnings (Loss) Per Share:

$

1.56

$

2.36

$

1.59

$

3.10

Shares Used for Computation:

Basic

123.268

123.573

123.212

123.534

Diluted

124.036

124.332

123.953

124.374

Cash dividend declared per share:

$

0.320

$

0.300

$

0.640

$

0.600

(a)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages.

(c)

Data presented includes information related to flights operated by Horizon and third-party carriers.

(d)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Three Months Ended June 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating& Other

Air GroupAdjusted(a)

SpecialItems(b)

Consolidated

Operating revenues

Passenger revenues

$

1,711

$

286

$

—

$

—

$

1,997

$

—

$

1,997

CPA revenues

—

—

137

(137)

—

—

—

Mileage plan other revenue

99

9

—

—

108

—

108

Cargo and other

49

1

1

—

51

—

51

Total operating revenues

1,859

296

138

(137)

2,156

—

2,156

Operating expenses

Operating expenses, excluding fuel

1,135

249

123

(136)

1,371

39

1,410

Economic fuel

432

65

—

—

497

(22)

475

Total operating expenses

1,567

314

123

(136)

1,868

17

1,885

Nonoperating income (expense)

Interest income

13

—

—

(3)

10

—

10

Interest expense

(22)

—

(5)

2

(25)

—

(25)

Interest capitalized

4

—

—

—

4

—

4

Other

1

(2)

—

—

(1)

—

(1)

Total Nonoperating income (expense)

(4)

(2)

(5)

(1)

(12)

—

(12)

Income (loss) before income tax

$

288

$

(20)

$

10

$

(2)

$

276

$

(17)

$

259

Three Months Ended June 30, 2017(c)

(in millions)

Mainline

Regional

Horizon

Consolidating& Other

Air GroupAdjusted(a)

Special

Items(b)

Consolidated

Operating revenues

Passenger revenues

$

1,677

$

268

$

—

$

—

$

1,945

$

—

$

1,945

CPA revenues

—

—

108

(108)

—

—

—

Mileage plan other revenue

101

8

—

—

109

—

109

Cargo and other

45

2

1

—

48

—

48

Total operating revenues

1,823

278

109

(108)

2,102

—

2,102

Operating expenses

Operating expenses, excluding fuel

1,030

206

116

(105)

1,247

24

1,271

Economic fuel

304

38

—

—

342

2

344

Total operating expenses

1,334

244

116

(105)

1,589

26

1,615

Nonoperating income (expense)

Interest income

10

—

—

(1)

9

—

9

Interest expense

(24)

—

(3)

1

(26)

—

(26)

Interest capitalized

3

—

1

—

4

—

4

Other

—

—

—

—

—

—

—

Total Nonoperating income (expense)

(11)

—

(2)

—

(13)

—

(13)

Income (loss) before income tax

$

478

$

34

$

(9)

$

(3)

$

500

$

(26)

$

474

Six Months Ended June 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating& Other

Air GroupAdjusted(a)

SpecialItems(b)

Consolidated

Operating revenues

Passenger revenues

$

3,153

$

529

$

—

$

—

$

3,682

$

—

$

3,682

CPA revenues

—

—

247

(247)

—

—

—

Mileage plan other revenue

197

18

—

—

215

—

215

Cargo and other

88

1

2

—

91

—

91

Total operating revenues

3,438

548

249

(247)

3,988

—

3,988

Operating expenses

Operating expenses, excluding fuel

2,266

488

227

(247)

2,734

70

2,804

Economic fuel

799

120

—

—

919

(35)

884

Total operating expenses

3,065

608

227

(247)

3,653

35

3,688

Nonoperating income (expense)

Interest income

24

—

—

(6)

18

—

18

Interest expense

(44)

—

(10)

5

(49)

—

(49)

Interest capitalized

8

—

1

—

9

—

9

Other

(4)

(9)

—

—

(13)

—

(13)

Total Nonoperating income (expense)

(16)

(9)

(9)

(1)

(35)

—

(35)

Income (loss) before income tax

$

357

$

(69)

$

13

$

(1)

$

300

$

(35)

$

265

Six Months Ended June 30, 2017(c)

(in millions)

Mainline

Regional

Horizon

Consolidating& Other

Air GroupAdjusted(a)

SpecialItems(b)

Consolidated

Operating revenues

Passenger revenues

$

3,052

$

495

$

—

$

—

$

3,547

$

—

$

3,547

CPA revenues

—

—

205

(205)

—

—

—

Mileage plan other revenue

194

15

—

—

209

—

209

Cargo and other

81

3

2

—

86

—

86

Total operating revenues

3,327

513

207

(205)

3,842

—

3,842

Operating expenses

Operating expenses, excluding fuel

2,030

406

219

(203)

2,452

63

2,515

Economic fuel

596

75

—

—

671

12

683

Total operating expenses

2,626

481

219

(203)

3,123

75

3,198

Nonoperating income (expense)

Interest income

17

—

—

(1)

16

—

16

Interest expense

(47)

—

(5)

1

(51)

—

(51)

Interest capitalized

7

—

1

—

8

—

8

Other

(1)

—

—

—

(1)

—

(1)

Total Nonoperating income (expense)

(24)

—

(4)

—

(28)

—

(28)

Income (loss) before income tax

$

677

$

32

$

(16)

$

(2)

$

691

$

(75)

$

616

(a)

The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.

(b)

Includes merger-related costs, an employee bonus awarded in January in connection with the Tax Cuts and Jobs Act, and mark-to-market fuel hedge accounting adjustments.

(c)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

Alaska Air Group, Inc.

CASM Excluding Fuel and Special Items Reconciliation

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017(b)

2018

2017(b)

Consolidated:

CASM

11.20

¢

10.34

¢

11.41

¢

10.66

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.82

2.21

2.74

2.28

Special items—merger-related costs and other(a)

0.24

0.15

0.21

0.21

CASM excluding fuel and special items

8.14

¢

7.98

¢

8.46

¢

8.17

¢

Mainline:

CASM

10.36

¢

9.48

¢

10.54

¢

9.79

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.68

2.13

2.60

2.20

Special items—merger-related costs and other(a)

0.25

0.17

0.23

0.24

CASM excluding fuel and special items

7.43

¢

7.18

¢

7.71

¢

7.35

¢

(a)

Special items includes merger-related costs and an employee bonus awarded in January in connection with the Tax Cuts and Jobs Act.

(b)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

Fuel Reconciliation

Three Months Ended June 30,

2018

2017

(in millions, except for per-gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

506

$

2.34

$

337

$

1.69

(Gains) losses on settled hedges

(9)

(0.04)

5

0.02

Consolidated economic fuel expense

497

2.30

342

1.71

Mark-to-market fuel hedge adjustment

(22)

(0.10)

2

0.01

GAAP fuel expense

$

475

$

2.20

$

344

$

1.72

Fuel gallons

216

201

Six Months Ended June 30,

2018

2017

(in millions, except for per gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

929

$

2.25

$

663

$

1.73

(Gains) losses on settled hedges

(10)

(0.03)

8

0.02

Consolidated economic fuel expense

$

919

$

2.22

$

671

$

1.75

Mark-to-market fuel hedge adjustment

(35)

(0.08)

12

0.03

GAAP fuel expense

$

884

$

2.14

$

683

$

1.78

Fuel gallons

413

385

Debt-to-capitalization, adjusted for aircraft operating leases

(in millions)

June 30, 2018

December 31, 2017(a)

Long-term debt

$

1,998

$

2,262

Capitalization of aircraft operating leases(b)

1,883

1,671

Adjusted debt

3,881

3,933

Shareholders' equity

3,593

3,460

Total Invested Capital

$

7,474

$

7,393

Debt-to-capitalization ratio, adjusted for aircraft operating leases

52

%

53

%

(a)

Certain historical information has been adjusted to reflect the adoption of new accounting standards.

(b)

Calculated using the present value of remaining aircraft lease payments.

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

By eliminating fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.

CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

GLOSSARY OF TERMS

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or "capacity"; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile